Revenue recognition is a big topic, especially if you are a technology company. The accounting standards are complex when determining what is revenue, when it can be recognized, and even how it is allocated among the line items in a single sales transaction.
Revenue recognition is complex
Multi-element arrangements — sales of related items in the same sales process — are a significant challenge in revenue recognition all on their own. There are recent changes regarding how they need to be addressed while new standards are still being proposed and discussed.
At Tensoft, experience has shown us that understanding revenue recognition is really only half the battle. The other half requires understanding the business processes that generate revenue, in other words, the go-to-market model used by your company.
Revenue recognition for subscriptions
There is a process, driven by sales and/or marketing in your organization, which finds interested folks and turns them into customers. This model matters – for productivity in your company, for capturing the right data in the best system, and for generating the full sales transaction efficiently to the revenue management engine.
Ecommerce based subscription sales are one significant category for go-to-market models. These types of sales are often heavily based on marketing efforts and to a lesser extent, sales. Usually the goal is for the company’s ecommerce platform to support the sales transaction and most of the customer business relationship. You may have team members providing support or deployment services, but the goal is usually efficient business transactions through the ecommerce portal.
The go-to-market analysis in this scenario (subscriptions) would typically include a greater level of customer management detail in the ecommerce platform and a consolidated or streamlined level of detail in the ERP system.
For example, individual customers are often maintained in the ecommerce platform, while they are not maintained in the ERP system. The ERP system may focus instead on the customer’s payment method – consolidating customers by merchant banking option of credit card name or PayPal.
However, revenue management may be done at the detail or the summary level. The summary level would be different from the ERP transaction summary – with a need to know item/SKU level (or revenue element level) detail. The detail level is clearer; however transaction volume — without a need for transaction level clarity — may push for appropriately segmented summarized daily information.
The revenue challenges for this model can include multi-element arrangements (setup fees or setup processes required as part of the subscription), usage-based revenue combined with or separate from amortization based revenue, or ongoing events that impact revenue timing or recognition periods. (Examples include go-live events, activation requirements, prepaid expiration periods, or a customer service-generated period of performance changes).
Revenue recognition solutions
Revenue recognition in an ecommerce subscription model is best served by the support of a revenue engine designed to work with the business model, that can capture the right transaction at the right level, and that supports a living revenue document or agreement model that understands that revenue recognition is not a static one-time event.
Revenue recognition for software is increasingly complex, especially in a subscription setting. You better have tools or services that can help you manage your transaction data to recognize revenue at the appropriate time.
Did you know?
Revenue management experts teach courses and do free online seminars to keep the public updated – including free webinars hosted by Tensoft.
This blog post originally appeared on the TenSoft blog as “Ecommerce Revenue Recognition Pitfalls for Technology Companies.”